Starting a VC Fund, Episode 8: Solo GP or Partners? Finding the Right Approach

My name is Patrick Iwas. I'm the founder and CEO of MindMaven. We're an executive coaching firm that helps people free up 10 hours or more a work week and then invest that time into relationships.

I'm Charles Hudson, managing partner at Precursor Ventures. We're an early stage venture capital fund that invests in the first institutional round of financing for the most promising startups out there.

Awesome. And so we're here today to talk about the team and people aspects of starting a new VC fund. Charles, you told me you're getting a lot of questions around that. And I think one of the questions that I would have is.

Do I go as a single GP or do we have to go find a partner? What are your thoughts there?

Boy, it's such a big question. And I will admit my bias in that I started off as a single gp. I think there's the practical and the sort of strategic question here. For me, it was a combination of practical and strategic decisions. So, you know, our first fund was relatively small, was $15 million. When I looked at the management fees that we had available and our strategy of investing in these pre traction companies, I asked myself, can I really make a credible offer to a great partner to join me on a small fund? And what I quickly realized is the people that I wanted to to join me from the beginning, they were all facing the same economics that I was. Most of the people I talked to when I started Precursor were like me. They were GPs or principals at other firms who wanted to have more independence. And I realized that for them the decision was do I go to Precursor and make a modest salary and split the carry, or do I start my own fund and go pursue something under my own shingle, under my own name, where I have total control? And for most of the people I wanted at the time when I started the fund, it was hard for me to argue that they were better off partnering with me than they were doing exactly what I was doing, starting their own fund under their own shingle. So I think you have to be realistic about, given the size of your fund, like what can you actually afford? And since most of the people I talk to are raising funds that are $50 million or smaller for the initial vehicle, you're only going to have a million dollars in management fees, which sounds like a lot, but when you start adding up all the things it really takes to run a fund, it's very difficult to accommodate two senior skilled people at that price unless they really want to work together.

So what I'm hearing You say here is that basically most people are starting off with a new venture fund, will raise a fund that is probably less than 50 million. And so there isn't that much of a decision per se. You know, it's either single GP or it is maybe a partnership. But that gets us into both of them. We'll probably have to make some sort of sacrifices financially to make it work.

And that gets you back to the discussion we had in a previous video about like how long and how, how much Runway will people have emotionally as well as financially to run it this way? So it's less of a big question than most people might think, is that what you're saying?

I think it's true. And I think the real risk of having a multi partner partnership, as we talked about before, is these questions of Runway. It's pretty rare to find people who are both in a financial position to make the sacrifices to work together as a team or a group on a sub 50 million dollar fund who are also raising a sub 50 million dollar fund. So, you know, if it's a partner from Benchmark and a partner from Sequoia spinning off to start their own fund, they're not going to raise a sub 50 million dollar fund. They're going to raise a much larger vehicle, most likely. And so I think for most people the real question is like, how hard is it to do this on your own versus being part of a team?

All right then if you're a single GP or not, another question that probably comes up is like, you know, who do you hire below you? Like, what more junior team members should you bring in? Like a junior associate as an example?

I think this is probably the key staffing decision most new venture firms have to make. It's like, what do I want my initial team to look like? I think it still comes back first and foremost to your strategy. What are you trying to do as a firm? So for example, at Precursor, we mostly invest in companies that are pre revenue, pre traction. There's not a lot of evidence to go by. So if I were to ask a relatively inexperienced person to choose among the pool of companies that we see, it would be hard. I couldn't give them much guidance. I couldn't tell them, look for companies that have 10 or $15,000 a month in revenue or 20,000 users, I'd have to tell them, look for people who are great. And that's a skill that comes with repetition and experience. And so I think for a really early stage pre traction, pre product companies, it's hard to have junior people as the front end of your process, the people who are doing the initial screening and intake, unless you come up with a very efficient way to train them, what you're looking for, by contrast, if you say, hey, look, I only really want to meet companies that have good gross margins, that are doing $10,000 a month in revenue and that are in these five or six categories, you could efficiently deploy a very smart junior person to sit at the front of your process and do screening and evaluation for a lot of companies and make sure that you as the partner, are only meeting with the ones that clear the bar. That's totally possible, but I think it comes back to your strategy. And again, most of the people I talk to are raising relatively small seed funds where the amount of traction that companies are going to have when they come to meet you is relatively light. So I found a lot of people struggle to get leverage out of junior people in the early days until they figured out how to teach what they're looking for.

All right, so the next question that I'm sure you get a lot of is this sort of people, managed people, resources around running the operations of the fund, CFO type of resources, et cetera, advice.

You know, we, we've learned a lot here at Precursor in our journey here. And what I would say is, unfortunately for, for many managers, I've got good news and bad news. The good news is you can get through Fund 1 without a CFO as part of your team. You can do it. You can brute force your way through it. It'll teach you the ins and outs of fund management, audit, tax, and all these things. The bad news is, I think as you scale your organization, this is a critical role you're going to want to fill at some point. Having somebody on your team who can help you with reserves, planning capital calls, paying bills, financial planning, tax and audit. As you have multiple funds under management that all have reporting burdens, the value of that person becomes super clear over time.

Yeah, but we're talking to people that are just starting the fund. Are you basically saying, don't go for it?

I think for most funds, you don't need it for your first fund, and that money's probably better spent elsewhere.

Wow. Because my gut reaction would be no. I mean, this is so core to the business. But you are really saying, don't worry about this now. You can get through it. And in fact, there are some hidden benefits in it that you will really understand the dynamics of how to run a specific venture fund. So, I mean, to Me, that sounds like a really big topic. And so what I think we should do is probably have another video on this in terms of just what it takes to run the operations, financial and otherwise, of a first time fund. All right, cool.

One of the last topics I think we should talk about is this question that you probably get a lot which is like, well, I want to build out a service component to how I run my VC firm. It seems to be the new standard, if you don't have it, you can't win, etc. Etc. And so what's your take on that specifically for folks that are going out for the first time?

I think most first time funds, the beauty of them is you're dealing with a lot of constraints. One of the biggest constraints you have as a first time fund is actually money. It forces you to prioritize the things that you absolutely can't live without as opposed to the things that would be nice to have. And one thing I've learned from studying some of the best firms in our business is a really well executed services organization. It's expensive and I think there's sort of two models I've seen. One model is a firm decides they want to make an in house internal investment in talent partners, marketing partners, all this infrastructure to help their portfolio companies and they bring these people on full time. That costs a lot of money to do. Well, I've seen, you know, peaked under the hood at first round and true. And some of these other firms, they've made significant long term investments in people and processes to make that happen. It's not something you should consider lightly. The other model I've seen people pursue is I'm going to get a bunch of advisors and friends and people in my network who are going to sign up to do things on behalf of our portfolio companies. And I found that the management of these people, whether you compensate them with carry or not, they're essentially unpaid volunteers who are doing this to help you. And it's very hard to get maximum value out of that network and those relationships if you don't have someone who's really staying on top of it and whose job it is to make sure that you're getting what you need to out of those folks. So I've seen many people say, don't worry, we've got this great network of 40 or 50 industry people that are on call activating them, managing those relationships, making sure they feel good about the time that they're investing. That's a job, that's a full time.

Job, right and probably very much challenging to actually get set up. You would have to invest a lot into setting expectations. Right. You have certain demands of how fast they have to help you get through certain things and often it ends up being too challenging to actually succeed unless you have a very clear and strong motivational model in it. Is that fair?

That's totally correct.

Now, I want to put you a little bit on the spotlight here, Charles, and that is that you're giving all this great advice. You had none of these things. You were a single gp, you didn't have a cfo and you for sure didn't have a service component yet. I know that you do a lot of really good service to your portfolio. That's one of the things you're actually known for as being one of the most founder friendly VCs out there. And I've also worked with you for a very long time. I think we started working while you were in your first fund.

What hire did you make in terms of allowing you to leverage your network a little bit more and.

Deliver better experiences to those people that you cared about most, particularly your founders in your portfolio?

Yeah, well, I put a lot of not to flatter you. I put a lot of credit on you and the time we spent together in developing processes and routines and trying to become way more systematic in some of the processes that we do on a repeated basis and also just helping me become a better communicator. As you know, being an investor dealing with early stage companies, you have a lot of emotionally charged, difficult conversations. And I think oftentimes the difference between building trust and eroding trust is how skillfully you can navigate those conversations. And I give you a lot of credit for your help and contributions on that front. I also have to give a huge shout out to our cfo because once we hit our third fund, it became very clear to me that the value of learning by doing, of fund management and interfacing with our fund admin team, I had reached the end of the journey of learning by doing. And in order to have a fund that I thought was professionally managed and reflected the quality bar that I wanted to deliver for our limited partners. We both had the need and the resources to bring that person on. And the other thing I would just encourage people to do is, you know, when I started Precursor, we were one person. It was just me. We were two people for another two years before we added the third full time team member to Precursor. So my advice to you all is you don't have to go from single GP to a 10 person company overnight. You can layer people in over time as you understand what you need. Like when we added Sydney to our team, it was clear to me that like, I needed a really smart operations person who I thought could grow into an investor. And then we got to a point where the two of us were overwhelmed and we clearly needed another person as part of the mix who could also help us run the systems that we'd built and take them to the next level. And so don't feel the pressure to go from sort of single GP to fully fleshed out operational team overnight. Give yourself time to grow into it and figure out what you need.

And if I throw in some more thoughts on that one, I would argue that if you are listening to us and you watch some of the other videos specifically building your story, I would assume that you might have a very specific story in mind of how you're going to run your venture fund. A very unique way of doing venture is probably part of what motivates you to think about this in the first place. And if that is true, then one of the benefits of going slow with more junior people is that you can actually maintain quite a bit of control over, over ensuring that you built and grow that the operations based on that story in such a way. Right. And that was probably one of the benefits, Charles, you also experienced in working with Sydney. Sydney has been able to really learn and adopt the precursor way that you set forth.

I've just found it's a lot easier to build your own firm's culture if you start with people whose experiences are mostly in your culture. I think the challenge with bringing in people who've worked at other venture firms is every venture firm has its own set of beliefs, practices, culture. And part of joining a new firm is you bring some of those things with you, Some of those things that you bring with you are great. And some of those things might be in conflict with the way a new firm operates. The one thing I knew from the very beginning about Precursor was our strategy was very unorthodox and very out of step with how most venture funds operate. And I felt like we were better served finding incredibly talented, smart, motivated, driven people who we could have learned the business of venture through the lens that we practice it, as opposed to trying to take really talented folks from other firms who would come to the table with a point of view about how to build things and we'd have to sort of convince them of the thing that they learned at their old firm, didn't apply it Precursor. So I tell everyone it's kind of like a renovation. You've got to go back down to the basics, to the studs, to start over and rebuild the house. And I said I'd rather just find really great, talented people who want to learn the way that we do things here.

And I would say that served you well so far. All right, that's it, guys. Thanks for listening.